Bankruptcy judge puts 2 cases on hold, stalls on 3rd

Wednesday

Nov 21, 2012 at 12:01 AM

STOCKTON - Former Fire Chief Ron Hittle and a 26-year-old man permanently disabled in a motorcycle accident will have to wait for Stockton to button up its bankruptcy case before taking the city to trial, a judge ruled Tuesday.

Scott Smith

STOCKTON - Former Fire Chief Ron Hittle and a 26-year-old man permanently disabled in a motorcycle accident will have to wait for Stockton to button up its bankruptcy case before taking the city to trial, a judge ruled Tuesday.

Yet U.S. Bankruptcy Judge Christopher Klein didn't dispense so quickly with a third case before him in nearly three hours of wrangling among attorneys. The judge asked them for more briefing before deciding the case with wide implications.

The unresolved case hinges on a proposed $55,000 payout - a relatively small sum of money - that Stockton wishes to make, settling a lawsuit filed by a man accusing three police officers of unnecessarily beating him.

Creditors with hundreds of millions at stake in Stockton's bankruptcy objected to the settlement, saying it would unfairly set a precedent if the city were allowed to begin settling cases outside of bankruptcy court.

Klein should first have to approve any settlements while the city is in bankruptcy, the creditors' attorneys contended.

"The city is requesting a license to discriminate against certain creditors," said attorney Matthew Walsh of Winston & Straw LLP, representing National Public Finance Guarantee, a creditor in Stockton's bankruptcy.

Stockton filed bankruptcy June 28, making it the nation's largest city to seek Chapter 9 protection. The city has ceased its payments on certain debt and wishes to reduce much more.

The case disputed Tuesday stems from the Jan. 15, 2010, arrest of Christopher Hallon. Officers accused him of fighting them, and Hallon accused three officers of using excessive force.

Attorney Marc Levinson, who is leading Stockton's bankruptcy, said that given Stockton's tight finances, it made more sense to settle than pay attorneys. The city is also in a record crime spree, and every officer is needed on the street rather than tied up in court, he said.

He also said that judges in Chapter 9 bankruptcies do not have the ability to tell a city how it can spend its money, which included making this settlement deal. The city and its creditors were concerned less with the sum of the settlement, he said.

"We're fighting over the principle," Levinson said. "You simply lack the power to tell the city how to spend its money."

Klein said he recognized that he was being asked to make a significant ruling.

"I'm not pleased with that," he said. "But that's why I make the big bucks."

Klein pressed attorneys for the creditors, saying he recognized his limitations in Chapter 9 earlier this year when he sided with the city, which he ruled at the time had the right to stop paying for the health care of its retired employees.

He asked the creditors to explain in their forthcoming briefs why this situation before him now was different. Klein set the next hearing in this case for Jan. 30.

"I want to decide it with my eyes wide open and get it right," he said. "I want to be fully informed of the issue."

The judge also ruled in two other lawsuits, upholding Stockton's wish to suspend them as they restructured the city's finances in bankruptcy.

Hittle, the city's former fire chief, asked to proceed to trial, seeking undetermined compensation for being fired by City Manager Bob Deis and Deputy City Manager Laurie Montes. He cited religious discrimination and retaliation.

Salvador Benavides, 26, also wished to pursue his lawsuit, alleging the city was at fault for his April 2011 motorcycle accident that left him with permanent brain damage and large medical bills.

Klein ruled that the city had proved that it has a skeleton crew in its City Attorney's Office, which is occupied now with the bankruptcy. The city is also liable for $1 million in costs and judgments until an insurance policy begins to pay.

Debtors in Chapter 9 bankruptcy, such as Stockton, are allowed to suspend litigation to give them breathing space. Stockton may settle these cases in bankruptcy, the judge said.